With 2020 over, it means the tax season to account is round the corner. Just like 2020, this tax season promises to be full of unique considerations- due to the coronavirus pandemic.
So it is essential to familiarize yourself with the latest updates to the IRS tax code and how it may affect you. The IRS is pushing the filing deadline back this year.
Below listed are the biggest tax law changes you will want to take heed of when filing in 2021.
Increase In Tax Brackets
What tax bracket your household income comes under defines what tax rate you will have to pay. While rates remained the same for 2020, the tax brackets increased by a few hundred dollars since 2019 to account the inflation.
You can determine at what percentage your income will get taxed this year from the AARP chart.
Standard Deduction Increased
The standard deduction for the tax year 2020 increased relative to inflation by $200 for single or married taxpayers filing separately, $300 for heads of households, and $400 for married couples filing jointly.
Remember, you can opt for itemizing deductions that take more time to calculate but may be worth it if the expenses exceed the standard deduction amount.
What To Know About Postponed Tax Deadline?
The IRS announced that it planned to extend the usual April 15 tax deadline to May 17 2021. This extension is necessary to give US citizens some needed flexibility in a time of unprecedented crisis.
This one of the tax law changes 2021 that you must know about that will prevent you from confusing tax deadline
Greater Deductions For Charitable Contributions
Under the Coronavirus Aid, Relief, and Economic Security Act, taxpayers no longer have to itemize deductions to write off charitable contributions. It is one of the other tax law changes 2021 you should be aware of.
If you do itemize deductions, you can deduct up to 100% of the remaining adjusted gross income based on how much you contributed to charities.
Under a bill Congress passed, Americans can now deduct for 2020 and beyond out-of-pocket medical expenses that exceed 7.5% of their AGI.
It is good news for taxpayers getting enough health care last year, provided they itemize deductions to write off the treatment bills.
According to CARES Act, taxpayers under 59 ½ were allowed to withdraw up to $100,000 from their 401(k) or IRAs. That too without incurring an early withdrawal penalty.
The downside is that money taken out of the tax-deferred retirement accounts prematurely will be taxed as ordinary income.
You can still score a refund on that tax amount by replacing the emergency withdrawals in 401(k) or IRA within three years.
More Time To Deposit In IRAs
Under the Setting Every Community Up for Retirement Enhancement Act of 2019, owners of traditional IRAs can continue depositing money into them past the earlier ceiling age of 70 1/2.
It means an ongoing chance for seniors to defer paying taxes on whatever income they stashed away in 2020, though the funds will get taxed on withdrawal down this road.
It is another crucial tax law changes you should be well aware of.
Increased Threshold For Earned Income Tax Credit
Any refundable credit eligible to low- and middle-income earners, the Earned Income Tax Credit got a bump in the maximum credit amount available and the income limits they get.
For 2020, taxpayers are eligible if the adjusted gross income isn’t higher than $50,594 or $56,844 for those filing jointly as married.
This credit can help save anywhere from $538 to $6,660 on taxes, depending on income; and household size. Keep this in mind as it is one of the crucial tax reforms 2021.
Finally, if you did take some money out of 401(k) or traditional IRA and you are facing a huge tax bill, don’t panic! You have three years to put the funds back and get a refund on any taxes you paid on that money.
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